Purchasing warranties on items typically isn’t the most exciting topic for most people. However, for the financial industry, there’s been a recent uptick in activity in the home warranty industry. Home warranties are getting more popular throughout the United States at a rate of 16% and investors are taking notice.
This fall, American Home Shield (AHS) and ServiceMaster announced that AHS would be spinning off into its own company under the name Frontdoor Inc [NASDAQ: FTDR] along with other ServiceMaster brands to focus on the home warranty industry. AHS is the single largest provider of home warranties in the US controlling 42% of the market according to data from Colonnade. Though Frontdoor had lower earnings than analysts hoped for in its first earnings report (citing claim payouts, meaning the warranties were doing their job), many investors are still bullish on the industry as a whole and Frontdoor specifically and AHS isn’t the only service contract provider investors are taking an interest in.
Why are Home Warranties Getting More Popular?
In even more recent news, San Francisco-based private equity firm Genstar Capital announced in November its acquisition of 2-10 Home Buyers Warranty, a provider of home warranty products to both homeowners and builders. Like many other private equity firms in San Francisco, Genstar focuses on innovative industries like software, industrial technology, healthcare, that offer investors significant avenues for growth, meaning that the acquisition of a home warranty provider is an interesting choice. But what’s making the home warranties so popular and should Minnesotans consider getting one for themselves?
Multiple factors are contributing to the growth of home warranties and subsequent investor interest, but two main reasons stand out among the rest: 1) Peace of mind, and 2) Faster/easier selling.
Unlike renters, homeowners have a long list of property matters to monitor and maintain over the lifespan of their property. From hot water heaters to washing machines, and even pools, it takes a lot of appliances and other machines to keep a home operating properly. The last thing anyone wants is to lose heat in the middle of a harsh winter storm or to be left stranded in a summer heat wave with no air conditioning.
To mitigate risk, homeowners will insure their homes to handle unforeseen events like natural disasters that may leave the property damaged. However, homeowners insurance is not the same thing as a home warranty and often won’t be of much use for smaller problems that arise for homeowners. Depending on the plan, home warranties cover all those moving pieces that get used day-in and day-out that keep the house functioning properly. A warranty means peace of mind for owners who don’t have the time, inclination, or extra cash sitting around to quickly repair or replace damaged items.
Secondly, home warranties help homeowners in the market sell their property faster, meaning an easier selling experience. Because of the peace of mind that comes with a home warranty, buyers look favorably at houses on the market that come with a home warranty. In fact, studies have found that home warranties increase home sale prices and reduce the length of time spent on the market for sellers. Buyers are often likely to be less apprehensive about a purchase when extended coverage is included after the closing date, and the sales price shows it as houses with home warranties sold for an average of $2,300 higher than those without them.
What This Means for Minnesota Residents
Obvious to anyone living here, Minnesota has some of the most beautiful outdoors experiences anyone could ask for. However, with that beauty comes a lot of bite during the winter months. Being the northernmost state in the lower 48, Minnesotans, and their homes, have to make it through the most brutal winters in the US. All things considered, that means it’s likely a good idea to look at Minnesota’s home warranty market.
Unlike other areas of the country, Minnesotans are uniquely situated to benefit from a good home warranty during the winter time as home appliances are really put to the test. Warranties typically cover a range of systems and appliances like electrical systems, central heating, water heaters, stoves, interior plumbing, ductwork, and more—all things you don’t want going out in the middle of the winter with an average temperature of just 8 degrees F (and sometimes as low as - 60F!).